Debunking Myths: The Origins of the U.S. Income Tax, Its Economic Impact, and the Great Depression

In the autumn of 2025, as President Donald Trump announced sweeping tariff hikes, he turned to history with a bold claim: the federal income tax, born in 1913, was a mistake enacted for “reasons unknown to mankind” and had plunged America into the Great Depression

. Tariffs, he argued, could have saved the nation. The story of the income tax, however, is not one of mystery or ruin but a deliberate chapter in America’s economic evolution, grounded in decades of debate and data.

Let’s unravel this tale, tracing the tax’s origins, its impact, and the true causes of the 1929 collapse, guided by the evidence of historians and economists.

Our story begins in the late 19th century, during the Gilded Age, when America’s wealth dazzled but divided.

Factories churned, railroads stretched, and tycoons like Rockefeller and Morgan amassed fortunes.

Yet, for farmers toiling in the Midwest and workers in urban tenements, life was a struggle.

The federal government leaned heavily on tariffs—taxes on imported goods—which filled its coffers with up to 90% of revenue in some years (Irwin, 2017).

These tariffs, however, were no equal burden.

They raised prices on essentials like clothing and tools, hitting the poor hardest, while the wealthy, earning from investments, paid little.

By 1890, the top 1% held 20% of national income, a chasm fueling unrest (Piketty, 2014). Farmers, forced to buy in a protected market but sell crops globally, joined populists in demanding change.

A fairer tax, they argued, should target wealth, not consumption.

The idea of taxing income wasn’t new. During the Civil War, in 1862, Congress had tested it, charging 3% on incomes above $600 to fund the Union’s fight.

It worked, raising millions, and was quietly repealed in 1872 (Weisman, 2002). The experiment lingered in memory, a seed of possibility.

By 1894, amid the Panic of 1893’s economic wreckage—25% unemployment, shuttered banks—Congress tried again, tucking a 2% tax on incomes over $4,000 into the Wilson-Gorman Tariff Act.

It aimed at the richest, but the Supreme Court, in Pollock v. Farmers’ Loan & Trust Co. (1895), struck it down, declaring such taxes unconstitutional unless apportioned by state population.

The ruling shielded the elite, infuriating reformers who saw a system rigged against fairness.

The tide turned in the early 20th century.

America was no longer a frontier nation; it needed roads, schools, a modern military.

Tariffs, tied to trade’s ups and downs, couldn’t keep pace.

The Spanish-American War of 1898 exposed this, as deficits loomed. Progressives, populists, and even some Republicans rallied for change.

In 1909, President William Howard Taft, a pragmatic conservative, backed a bold move: a constitutional amendment to free Congress from the Pollock ruling.

The Sixteenth Amendment, proposed that year, declared income taxes legal “from whatever source derived.”

By February 1913, three-quarters of states ratified it, a testament to widespread demand for reform (Brownlee, 2016).

Far from “unknown reasons,” the amendment was a calculated step to modernize finance and ease inequality’s strain.

That October, the Revenue Act of 1913 brought the income tax to life. It was modest: 1% on incomes above $3,000 ($4,000 for couples), with surtaxes up to 6% for those earning over $500,000—fortunes of the Carnegies and Vanderbilts. Only 2% of Americans paid it, sparing the middle and working classes.

The goal was clear: shift the burden upward and cut reliance on tariffs, which dropped as a revenue source.

By 1920, the income tax supplied 60% of federal funds, tariffs less than 20% (Council of Economic Advisers, 2021).

This wasn’t an accident but a pivot to stability, freeing the government from trade’s volatility. Lower tariffs meant cheaper goods, a boon for consumers battered by high prices.

The tax proved its worth quickly. When World War I erupted, Congress raised rates—up to 77% on top incomes—generating billions without breaking the economy (Saez & Zucman, 2019).

After the war, America entered the Roaring Twenties, a golden era that belies Trump’s tale of tax-driven ruin.

Factories hummed, cars rolled off assembly lines, and electricity lit homes. Real GDP grew 4.2% a year from 1922 to 1929; unemployment hovered below 4% (Romer, 1999).

The stock market soared, the Dow Jones climbing from 63 in 1921 to nearly 400 by 1929 (Gordon, 2016).

Treasury Secretary Andrew Mellon, no fan of high taxes, slashed rates—the top fell to 25% by 1925—arguing it spurred investment.

Whether these cuts or innovations like Ford’s assembly line fueled the boom, the income tax didn’t choke it.

It quietly funded roads, veterans’ care, and early public works, while taxing the rich eased tensions over inequality, still stark with the top 1% holding a fifth of income (Piketty, 2014).

Then came October 1929.

The stock market crashed, erasing $30 billion in wealth—$500 billion today (Eichengreen, 1992).

Trump points to the income tax, claiming it set the stage for this collapse.

The evidence tells a different story.

The crash wasn’t born in 1913 but in the frenzy of the late 1920s. Investors, drunk on rising stocks, borrowed heavily; margin debt hit 10% of GDP.

When confidence faltered, the bubble burst (Galbraith, 1954). If anything, Mellon’s tax cuts, leaving more cash with the wealthy, may have fed this speculation, not the tax’s existence. The income tax, steady for 16 years through growth, had no role in the market’s fever.

The crash was just the spark.

The Great Depression, a decade of misery, grew from deeper failures. Banks, overexposed to stocks, crumbled as depositors rushed to withdraw savings.

By 1933, 9,000 banks failed, slashing the money supply by 30% (Friedman & Schwartz, 1963). The Federal Reserve, meant to stabilize, misstepped, tightening credit to cling to the gold standard instead of lending.

Economist Milton Friedman later called this a fatal error, unrelated to taxation. Banks lacked reserves; there was no deposit insurance—flaws predating 1913.

The income tax, far from causing this, helped. Its revenue funded President Hoover’s early relief, like the Reconstruction Finance Corporation, though too timid to stem the tide.

Then came a policy that truly worsened the slump, one Trump’s narrative overlooks: the Smoot-Hawley Tariff Act of 1930.

Congress, hoping to shield farmers and factories, jacked tariffs to 59%. Over 1,000 economists begged Hoover to veto it; he didn’t.

Canada, Europe, and others retaliated, and global trade imploded. U.S. exports plunged 67% by 1933, turning a recession into a global disaster (Irwin, 2011).

Economist Douglas Irwin argues Smoot-Hawley deepened the depression’s pain, a stark contrast to the income tax, which hummed along, funding what little aid existed.

Trump’s claim that tariffs could have saved America ignores this lesson.

High tariffs, like McKinley’s in 1890, had already sparked trouble, contributing to the Panic of 1893’s 25% unemployment (Romer, 1986).

Other forces fed the depression’s grip. Inequality, unchecked despite the tax, meant the rich saved, not spent, starving demand (Piketty & Saez, 2003).

Farmers and factories overproduced, driving prices down and profits with them.

War debts and reparations from 1918 strained global finance.

None of these traced to the income tax, which had supported a thriving economy for over a decade.

To claim it caused the depression is to rewrite a story told by data: GDP growth, low unemployment, and rising living standards until 1929.

Trump’s nostalgia for tariffs paints a golden pre-1913 era, but the numbers don’t align.

Tariffs under McKinley protected some industries but raised prices and invited trade wars.

They couldn’t fund a modern state.

In 2023, tariffs brought in $80 billion, income taxes $2.2 trillion (CBO, 2024). A 50% tariff on all imports might yield $500 billion—still short of a $4.5 trillion budget—and spike inflation, hitting consumers (Baker, 2025).

The income tax, progressive and scalable, met needs tariffs never could, from war to welfare. It wasn’t perfect, but it wasn’t the villain.

Why this story now? Trump’s claims aren’t just history lessons; they’re a pitch for 2025’s tariff hikes, a 10% universal levy and more.

Economists warn of echoes—Smoot-Hawley’s trade wars, rising costs, maybe recession (Baker, 2025). The depression showed protectionism’s risks.

Franklin Roosevelt, taking office in 1933, cut tariffs through trade agreements and used tax revenue for the New Deal—jobs, dams, Social Security—that pulled America back by 1939 (Bernanke, 2000).

Today’s economy, woven into global chains, resists tariff cures. Jobs lost to automation, not just trade, won’t return with duties.